True citizens, honest guardians, proper markets and just laws

J.L. Ilsley, Canadian finance minister, U.S. secretary of treasury, Henry Morgenthau Jr., president of the conference and M.S. Stepanov, deputy people's commissar of foreign trade of the Soviet Union, from left to right, are pictured conversing during the United Nations Monetary and Financial Conference July 2, 1944. (AP Photo)

Martin Wolf has a thoughtful piece in the Financial Times, here, on the prerequisites for democracy. As readers of this blog will know, I have enormous respect for Wolf's work. His latest article was likely motivated by the brinkmanship being played out in Crimea: had there been a more stable democracy established in Ukraine, perhaps, the instability of recent weeks would not have provided President Putin with the pretext for his de facto annexation of the Crimean peninsula.

Wolf's title pretty much sums up his thesis. To that list, I would add something about a favourable international environment. A growing global economy is probably neither a necessary or sufficient condition for nascent democracies to flourish, but it surely helps. Beyond that, clear rules of the game supported by international institutions, which reduce uncertainty and facilitate timely, orderly adjustment to external shocks that could stress emergent political frameworks, are undoubtedly important.

The Bretton Woods system did just that: short-term balance of payments support extended under "adequate safeguards" to countries experiencing negative terms of trade shocks provided countries with the breathing space necessary to strengthen policies, promote adjustment and eschew the beggar-thy-neighbour policies that had been so damaging to global trade and finance in the 1930s. The political goal was to avoid a repetition of the inter-war experience in which a nascent democracy in Weimer Germany was undermined by intolerable adjustment burdens and a dysfunctional monetary system.

This imperative was no mere coincidence. By the summer of 1944, the outcome of the war was not in doubt; the key unanswered question was what would be the final ghastly cost in human lives. By that time, FDR was determined that US GIs would not be sacrificed to restore European colonies. The post-war world would, he determined, be safe for democracy. In this respect, FDR hoped to avoid the mistake of his predecessor, Woodrow Wilson, whose support for self-determination (for European peoples, at least) at Versailles had led to the creation of patchwork of small, vulnerable countries. A stable international economy and international institutions that assist countries in times of economic and financial stress would reduce the risk of future conflicts.

This goal would be promoted in two ways. First, by promoting access to, and the allocation of, resources through transparent markets and a liberal trading system; not through the opaque state-to-state agreements and preferential trading arrangements that had prevailed in the 1930s. Second, by assisting countries to deal with external shocks so that democratically accountable governments would not be forced to adopt draconian polices to compress domestic absorption — consumption, government expenditures and investment — in order to meet balance of payments constraints.

The system was designed to support international trade and payments and not a particular economic model. Indeed, decisions of the two Bretton Woods institutions — the International Monetary Fund and the World Bank — were to be apolitical, based on technical analysis, not geopolitics. The Soviet Union was an active participant in the Bretton Woods and efforts were made to accommodate its participation at the decision-making bodies of the two institutions. Soviet seats at the Bretton Woods institutions were never occupied, however, as Churchill’s iron curtain descended from “Stettin in the Baltic to Trieste in the Adriatic” and Soviet central planning was extended across Eastern Europe, with resources allocated on the basis of opaque state-to-state arrangements and inconvertible currencies.

In this environment, realpolitik led to a reassessment of the importance of ensuring strong European allies, even if this meant taking a more elastic approach to the issue of colonies. Nevertheless, the idealism that motivated those “present at the creation” of a new, more democratic system of international governance should not be dismissed. True, the system is today under enormous stress from the weight of its own success — many of the economies that had been colonies or under the influence of colonial powers, or which had languished in under-development at the time of the Bretton Woods conference 70 years ago, are rising economic powers. And, as recent developments show, there are political challenges to the system. But the emerging powers that demand greater voice in the international architecture must embrace the obligations and responsibilities that go with leadership. The challenge for all members of the international community is to be true citizens and honest guardians of proper markets and just laws at the international level.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

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